How Businesses in China Can Map Franchise Fees to Services Before Franchising

When turning an existing business into a franchise network, companies can be tempted to decide how much to charge first and define the services afterwards. A more reliable approach is to reverse that order: establish what head office will provide and how it will deliver it, then draw up a fee schedule that can be checked against those commitments. This article focuses on the relationship between fees and services, helping businesses avoid duplicate charges, hidden costs and unclear delivery responsibilities.

1. Distinguish between types of payment rather than calling everything a franchise fee

Bring together the heads of finance, franchise recruitment and operations to list every payment a franchisee may need to make to head office, from initial preparations through to day-to-day trading. Do not rely solely on the recruitment quotation: review training arrangements, system requirements and purchasing terms to identify compulsory charges outside the quoted price.

Consider grouping payments by their purpose:

• Fees for the right to use business resources: Specify which resources the franchisee is entitled to use, which outlets the rights cover and how long they last. Avoid vague descriptions such as ‘brand support’.
• Opening support fees: State whether services such as pre-opening guidance and initial training are included in the initial payment, and which attract separate charges.
• Ongoing service fees: Define the scope of services such as operational guidance and technical support, and explain whether charges are periodic or calculated using an agreed basis.
• Deposits and payments collected on behalf of others: List these separately, explaining their purpose and how they will be held or settled. They should not be presented as income from services already delivered.

These are management categories, not statutory fee categories. The names may vary, but relabelling a charge must not obscure its true nature. If separate advertising and promotional fees are charged, the requirements governing their designated use and disclosure of how they are spent must also be followed. They should not be vaguely bundled into general management fees.

2. Create a verifiable link between each fee and what it covers

Article 11 of China’s Regulations on the Administration of Commercial Franchising requires written franchise agreements to specify the types, amounts and payment methods of fees, as well as the precise content and delivery methods of services such as operational guidance, technical support and business training. Article 14 further requires franchisors to continue providing the relevant services as agreed.

A fee schedule should therefore contain more than three columns headed ‘item’, ‘amount’ and ‘payment date’. At a minimum, consider adding the corresponding rights or services, delivery method, responsible department, evidence of completion and the arrangements if delivery does not take place.

For example, an ‘opening training fee’ should specify who will be trained, the number of participants covered, the course schedule, the assessment method and whether travel and accommodation are included. Training notices, attendance records and assessment results can serve as delivery records, but a single attendance entry is not enough to establish that all services have been completed.

For ongoing operational support, specify the service channels, frequency or circumstances that trigger support. Avoid promising ‘support throughout’ while reducing head office’s contractual obligations to providing a telephone advice line. Fees for licences to use business resources, such as trade marks, should also define the limits of the licence: not every charge should be packaged as a one-off service.

3. Make calculation rules and payment triggers clear enough to apply directly

Check each charge to establish whether it includes tax, when the relevant invoice or receipt will be issued, which entity receives payment and the date from which the charge begins to accrue. For turnover-based fees, define the calculation basis. For example, explain whether refunds are deducted, how discounted sales are treated and how differences in platform settlement figures are reconciled, rather than simply stating a percentage.

Pay particular attention to the following situations:

• Delayed opening: Agree clearly whether ongoing fees begin when the contract takes effect, when the system is activated or when the outlet actually opens.
• Additional services: Specify when refresher training, extra on-site support and similar services fall within existing obligations, and when they require a separate quotation and approval.
• Third-party charges: Clearly disclose who provides systems, payment or equipment services, who collects payment and whether purchase is compulsory.
• Price adjustments: Agree the conditions for changes, the notification method, the effective date and the process for resolving disagreements in advance. Avoid simply reserving an unrestricted right for head office to change prices.

These matters are primarily questions of contract design and should not all be presented as legal requirements. Important fee and liability clauses should be clearly displayed, with legal advisers checking their fairness and any requirements to draw attention to and explain them.

4. Use one consistent schedule for disclosure, signing and collection

China has a dedicated regulatory framework for commercial franchising. The Regulations on the Administration of Commercial Franchising require franchisors to provide the prescribed information and a copy of the contract in writing at least 30 days before the franchise agreement is concluded. Franchise fees are among the matters that must be disclosed. Fee arrangements in recruitment quotations, disclosure documents and contract schedules should be consistent. Businesses should not attract franchisees with a low price and then introduce additional compulsory charges through operational notices.

If a prospective franchisee is required to pay before the franchise agreement is concluded, Article 16 also requires a written explanation of what that payment will be used for, along with the conditions and method for refunding it. Calling it a ‘place reservation fee’ or an ‘expression-of-interest deposit’ does not replace that explanation.

Before putting the schedule into use, ask a colleague who was not involved in pricing to calculate the charges for three scenarios: an opening on schedule, a delayed opening and additional training. If the same scenario produces different answers, clarify the terms. Then assign a version number and effective date to the fee schedule. Finance should collect payments in accordance with the contract and confirmed amendments, while operations should retain service delivery records against the corresponding entries.

Practical takeaway: Before recruiting franchisees, complete a table linking ‘fees — rights or services — calculation rules — evidence of delivery’. Every compulsory charge should have a clear basis, and every paid service should have someone responsible for delivering it. This is fundamental to building trust within a franchise network.